Bank of America on Monday will launch a 3% down payment home loan in partnership with Freddie Mac, but the bank will not retain any risk if the loans default.
The Charlotte, N.C., bank will sell the loans and mortgage servicing rights to Self-Help Federal Credit Union, a Durham, N.C., nonprofit community development lender. The Affordable Loan Solution program is available only to borrowers with incomes of less than 100% of an area's median income.
B of A has essentially created an alternative to the Federal Housing Administration while reducing its downside risk through the partnerships. Many lenders have pulled back from FHA lending out of concern that they could be sued by the agency if the loan defaults. Meanwhile, Freddie Mac and Self-Help are eager to tap B of A's vast distribution network of branches and loan officers to reach as many low- and moderate-income borrowers as possible.
"We absolutely believe that we're setting up borrowers for sustainable homeownership," said D. Steve Boland, B of A's consumer lending executive. "We've put a lot of controls and guardrails around managing our risk. We wanted to make sure the program is structured to set the borrowers up for success."
Martin Eakes, the co-founder and CEO of Self-Help Federal Credit Union, said the modest goal is for the program to originate roughly $300 million mortgages in the first year for 3,000 homebuyers. Self-Help, which has 40 branches in three states, will provide required counseling for first-time homebuyers. The loans will be serviced by RoundPoint Mortgage Servicing, a specialty servicer that works with distressed borrowers.
Self-Help will retain the so-called representation and warranties risk on the loans. Since the credit union's venture fund takes the first-loss position on the mortgages, they require no mortgage insurance, which makes them more affordable.
With interest rates at record lows, mortgage lenders are structuring various programs to reach more low- and moderate-income borrowers.
Borrowers seeking loans under the new program must have a minimum FICO score of 660, which is higher than B of A's current minimum 600 FICO score for Federal Housing Administration loans. Borrowers also must have a maximum debt-to-income ratio of 43%, in line with ability-to-repay requirements.
The program will also consider nontraditional forms of credit. Loan amounts are limited to current conforming loan limits of $417,000. Borrowers also are not required to have any reserve funds and they can use secondary financing.
Last year, B of A launched an online down payment resource center that lists more than 1,000 down payment and closing cost assistance programs. Homebuyers are encouraged to tap those resources to help with the hurdle of coming up with a down payment.
Freddie has been tweaking its 3% down payment program, known as Home Possible Mortgage, since its launch in early 2015. (Fannie Mae has a similar program, called HomeReady, that it launched in December 2014.) In October, Freddie announced a partnership with Quicken Loans, the second-largest U.S. home lender, to co-develop products for millennials, first-time homebuyers and middle-class borrowers.
But it has been a struggle for many potential homebuyers, particularly those with low and moderate incomes, to come up with a down payment.
Before the financial crisis, Self-Help worked with 30 large lenders originating loans for 50,000 low- and moderate-income homeowners. That program came to a halt when Fannie Mae and Freddie Mac were placed into conservatorship in 2008. Eakes hopes the program with B of A will be expanded over time.
"The need for affordable home loans is perhaps greater now than ever," Eakes said.
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Corrected February 22, 2016 at 2:21PM: An earlier version of this article gave the wrong reason why the low down payment loans in the program require no mortgage insurance. They are spared this requirement because Self-Help Credit Union's venture fund takes a first-loss position not because Freddie insures the rest of the mortgage.